Tagged: FRANCE

Tensions Rise in EU Deficit Battle

What is the difference between a turtle and the European economy? The turtle is moving fast forward. There are no lights in the tunnel either, especially when we take into consideration the situation in the big French economy. The socialist government came into power on promises to get the economy going, turn the tide on employment and get the austerity dementors from Brussels off the back of the French people. They have not delivered on a single one of their promises, and even though it takes time for new economic policies to sink in, the French socialist government is closing in on two years in office and should at least be able to produce some credible signs of recovery. But that is not the case. On the contrary, whatever blip on the radar they have been able to produce is succumbing under their tax increases and even more stifling regulatory incursions into the private sector:

GDP Growth French

The rather tepid growth record of the French economy is having a real impact on its government’s relations to Brussels. With the tax base (GDP) barely growing at half a percent per year, it is arithmetically impossible for the government in Paris to close its budget gap. As a result, Euractiv.co, reports:

France is again seeking an extension from the EU on the deadline to reduce its national deficit. European Parliament President Martin Schulz supports the idea but the German government is insisting on adherence to the guidelines of the European Stability Pact. EurActiv Germany reports. In a speech earlier this week, French President François Hollande made it clear he would attempt to renegotiate Brussels’ demands to reduce the French deficit to under 3% of GDP by 2015. The new finance minister, Michel Sapin, also intends to renegotiate the timeline with the European Commission. “The government will have to convince Europe that France’s contribution to competitiveness, to growth, must be taken into account with respect to our commitments,” Holland said on 31 March. But the EU has already given the country two extra years to comply with the Stability Pact’s deficit limit of 3% of GDP.

This is raising tensions over the Stability and Growth Pact, effectively the legal deficit-cap instrument in the EU constitution:

On Thursday (3 April) in Frankfurt, ECB President Mario Draghi again stressed how important it was for eurozone countries to honour their fiscal commitments within the EU. On Friday morning, European Parliament (EP) President Martin Schulz, spoke in favour of meeting French demands. Schulz is the European Socialists’ candidate in the upcoming European elections. Speaking on BFM-TV in France, he said the country must be given more time to comply with the Maastricht criteria. The rules of the Stability and Growth Pact, with its debt limit of 3% must “be reconsidered”, said Schulz. Norbert Barthle is Bundestag spokesman on budgetary policy for Merkel’s Christian Democratic Union (CDU). In his view, another postponement of the deadline should only take place under clear conditions which state that France will really put its budget back on course. The chairman of the Bavarian Christian Social Union (CSU) political group in the EP, Markus Ferber strongly criticised Schulz’s demands to soften the terms of the Stability and Growth Pact: “While the CDU and the CSU have been acting as a fire brigade to extinguish the euro debt-crisis, Martin Schulz is adding new fuel to the growing fire.”

Schulz is the socialist candidate for president of the EU Commission, with a strong statist agenda in his hand. His desire to water down the Stability and Growth Pact has nothing to do with concern for the French economy – it is primarily motivated by a desire to give government the room to grow without any real limits.

Secondarily, Schulz is vehemently against the austerity policies that the EU-ECB-IMF troika has been forcing on some EU states. I share his resistance, but for entirely different reasons. While Schulz sees austerity as an impediment on government growth, I view it – or at least its European iteration – as a macroeconomic poison pill. It is a good idea to stop austerity policies, but the replacement should absolutely not be more government. The French government is way too big, but this is also the case in Europe in general – which is why there is no recovery in sight. On the contrary, stagnation is the new normal. In the last quarter of 2013, industry activity in the EU-28 and euro-18 areas were as follows in key sectors, measured in gross value added (one of three ways of measuring GDP):

  • Manufacturing grew 1.7 percent over the same quarter in 2012; 1.3 percent in the euro area;
  • Construction declined 0.4 percent, the 11th quarter in a row with declining activity in this sector; in the euro area the decline was 1.7 percent, the 22nd negative quarter in a row!
  • Finance and insurance contracted 0.9 percent in EU-28, 1.1 percent in euro-18.

Measured as employment, the numbers do not look better:

  • Manufacturing employment contracted 0.7 percent in the fourth quarter of 2013, the eighth straight quarter with a decline; the decline was 1.2 percent in euro-18;
  • Construction saw employment shrink by 1.4 percent, the 22nd straight negative quarter; the decline was a notable 2.9 percent in euro-18, marking the 23rd quarter in a row with declining construction employment;
  • The financial-insurance industry basically stood still at +0.1 percent (-0.3 percent in euro-18).

(All numbers are from Eurostat.)

Things may turn around when we get the numbers from Q1 of 2014, but I see no substantial reason to expect a sustained recovery. On the contrary, everything points to continued stagnation, in France as well as in Europe. This does not bode well for the future of the continent – perhaps the EuropeanS should get used to scenes like this one:

 

Dark Shadow Rising over Europe

This past weekend the French went to the ballot boxes in local elections. Recent pan-European polling has indicated that the socialists could become the largest group in the European Parliament, and that may very well happen. But if Sunday’s French local elections are any indication of what French voters think, perhaps the socialists in general should not get their hopes up too much. They were dealt a very serious blow by the electorate – and to make the defeat even more humiliating, the winners were of another, competing authoritarian brand:

The far-Right Front National (FN) was on course on Sunday night to make historic gains in France’s first nationwide elections since François Hollande became president. In what Marine Le Pen, the FN leader, described as a “breakthrough” and the “end of bipolarisation” of French politics, her party came out ahead in a string of French towns in the first round of municipal elections. The FN won an outright majority in the northern town of Henin-Beaumont and was first-placed in the eastern town of Forbach and the southern towns of Avignon, Perpignan and Béziers.

At the same time, the Telegraph reports, the socialist party…

was heading for heavy losses as voters appeared to punish his dithering and lack of results two years into his five-year mandate. These could trigger a re-shuffle of his cabinet, potentially seeing Ségolène Royal, his former partner and mother of four children, take up a ministerial post. … Almost 45 million French took to the ballot box to elect more than 36,000 mayors for the next six years in what was being seen as a test for the Socialist president, whose approval ratings have sunk below 20 per cent. While municipal elections are fought above all on local issues, disaffection with the main parties clearly bolstered the score of the anti-immigration, anti-EU Front National in the two-round contest.

The nationalists are the only political movement in Europe that can compete with the socialists in terms of authoritarianism. They are a less homogeneous crowd compared to the socialists, in part because Europe – at least right now – does not have that many strong outright communist parties. A notable exception is Syriza which essentially wants to turn Greece into a European version of Venezuela. However, the main reason for this is not that voters in Europe in general have turned their backs on collectivism – it is more a matter of socialists having pushed their ideological goals farther into the murky badlands of government expansionism. In some countries, like Italy, Portugal and Sweden, it is difficult to separate socialists from communists.

Alas, while the socialists are pretty well united around goals such as an even bigger welfare state, even more income redistribution and even more government interference with private businesses (and in some cases the nationalization of banks), the nationalists span a broader spectrum of views and visions. The “mild” version of the welfare state is represented by the Swedish Democrats and the Danish People’s Party in Scandinavia, the Pim Fortuyn List in the Netherlands and the Austrian People’s Party. A bit farther away are Vlaams Belang in Belgium, a separatist, nationalist party that basically wants to split Belgium in half and form an independent Flemish republic. Hungary’s ruling nationalists also belong in this category, as does Front National in France.

So far, the nationalists are essentially modern versions of reborn social-democrat parties from the 1920s and ’30s. Vigorously nationalist as those parties were, they drew a firm demarcation line between themselves and working-class imperialist communist parties of that time. The nationalism of the social-democrat movements were skillfully toned down and eventually removed after World War II and the atrocities committed by the National Socialists in Germany, leaving a vacuum that became even more glaring as Europe – in the middle of its long-term unemployment crisis – opened their doors to large scores of non-European, non-Christian immigrants.

Nationalists began alleging, in some instances correctly, that immigrants came and took jobs from Europe’s own young. They also alleged, even more correctly, that large segments of the immigrant population ended up living well off the welfare state. While the correct conclusion would have been to abolish the welfare state and respect each individual’s right to migrate if he can support himself, the nationalist conclusion was to reduce or even stop entirely any new immigration from outside the EU.

In some cases this sentiment has escalated to yet another level. Golden Dawn in Greece represents its most aggressive iteration, but the National Democrat Party in Germany are not far behind. In Sweden, the Party of the Swedes is capitalizing on rising but misguided frustration over high unemployment – especially among the young – and large immigration. Having their roots in now-defunct the National Socialist Front, the Party of the Swedes is not ashamed of calling for a fascist Sweden.

Some claim that this the outermost extreme of Europe’s new nationalist movement is out to build a unified, European fascist state. I would not be surprised if they are correct, but so far I have not found fully credible sources for this claim. Nevertheless, such an ambition goes well with traditional fascist ideology and would explain their keen interest in gaining a strong foothold in the EU parliament.

The big tragedy in all this is not that one of two collectivist, authoritarian flanks are competing for political power in Europe. The big tragedy is that less-collectivist segments of the European political spectrum are slowly imploding. Christian Democrats, Conservatives and Liberals have all been passionately pro-EU for decades, and now that the EU has basically turned into a power-grabbing behemoth voters quickly associate the power grab and the destruction of large parts of the European economy with the most EU-friendly parties. When they are now pushed to the edge of their own economic existence, and when they feel that their national governments are basically powerless vs. the EU, millions of voters turn to radical parties to find a “quick fix”.

Does this mean Europe’s fascism has been reborn? Eric Draitser over at the Boiling Frogs Blog seems to think so. He draws parallels between the nationalist movement in Ukraine and Syriza in Greece. I do not completely agree with him – I do not yet see a fully coherent fascist movement across Europe – but his article is well worth a read. I do agree that there is a dark shadow rising over Europe; the big question is just how big and ominous that shadow will become. And there is absolutely no doubt that it is growing, as shown in part by the very strong performance of Front National in France this past weekend.

France, Germany on the Downslope

Recently I have reported how Europe’s troubles continue, now in the form of deflation and rising poverty. But unemployment is still a major issue; recent signs of plateauing or even a minor decline in joblessness are indicators of stagnation rather than a recovery under way.

Today I can report yet more evidence that Europe’s crisis is continuing. From Euractiv:

One of French President François Hollande’s ambitions is to put in place social and fiscal convergence between his country and Germany, but for now the two economies are taking opposite turns. The number of unemployed people looking for a job has increased by 0.3% in France, which marks the president’s failure to decrease unemployment by the end of 2013. According to official figures published by the Labour Ministry this week, people without any activity (known as category A) have reached a record high number of over 3 million. Categories B and C (persons who have a slower activity) has increased by 0.5 to reach 4,898,100 in continental France and over 5 million including the overseas territories.

It is difficult to give “slower activity” a statistically meaningful definition. However, there are some ways to measure it, and as Eurostat has shown there is a widespread problem in Europe with people not getting full-time jobs. Part of the reason, especially in the French case, is the incredible rigidity of their hire-and-fire laws. But on top of that there is also the problem with unending austerity – aimed at saving the welfare state when tax revenues decline – which depresses overall economic activity. So long as European austerity continues there can be no recovery in private-sector activity. As a result, the French government will fail miserably in its attempts to put the economy back on a growth track again. This failure includes the so called “responsibility pact” that the socialist government came up with last year. Euractiv again:

These figures were published on the day when Prime Minister Jean Marc Ayrault was meeting with employers’ and trade unions’ organisations to launch the “responsibility pact” announced by the president and which looks to reduce employers’ contributions in exchange for commitments for more job creation.

Long story short, the French government is doing practically everything wrong. That includes trying to take advice from its German neighbor. Back to Euractiv (and a poorly written part of the article):

The situation is Germany is radically different. At the beginning of January, Germany unveiled that after four months of rising unemployment, figures fell by 15,000 to 2965 million [sic!] in December in seasonally adjusted (SA) data, according to the Federal Labour Office. The unemployment rate remained stable at 0.9%, [sic!] close to its lowest level since 1990, after a peak in 2011. In absolute numbers the job seekers, however, increased by 2.87 million against 2.80 million in November and the unemployment rate reached 6.7% against 6.5%.

Obviously, Germany does not have 2,965 million unemployed – the article meant to say 2.965 million. Also, the German unemployment rate is not 0.9 percent… The latest monthly Eurostat figure, from November 2013, is a seasonally adjusted 5.2 percent. This is still low, and less than half of the EU average. But the trend is no longer downward, and there is a good reason for that. Consider the following national accounts numbers for the German economy, reported in fixed prices:

2007 2008 2009 2010 2011 2012 2013
Gross exports 8.0% 2.8% -13.0% 15.2% 8.0% 3.2% 0.6%
Private consumption -0.2% 0.8% 0.2% 1.0% 2.3% 0.8% 0.9%
GDP 3.3% 1.1% -5.1% 4.0% 3.3% 0.7% 0.4%

The Gross exports numbers explain why the German economy has been so good at producing jobs recently. But as the number for 2013 shows, that boom is tapering off. In order to keep growing, the German economy would need the domestic, private sector to take over. The only way this could happen is if private consumption went into high gear, obviously has not happened. Over the seven years reported here, German private consumption has exceeded two percent growth in one year only, namely the second year of the fabulous export boom of 2010-11. With consumption growing at less than one percent, and the export boom coming to an end, it is safe to say that the German economy will not continue to push down its unemployment rate. Not surprisingly, GDP growth is now below one percent for the second year in a row, with a declining trend.

These numbers from Germany verify that the European economy completely lacks ability to grow on its own. The reason, again, is the depressing campaign to save fiscally doomed welfare states in the midst of a recession. If Europe’s political leaders had the courage – as well as moral conviction and economic insight – to let go of the delusion of a big, redistributive government, then Europe would quickly rise to once again become an engine in the global economy.

Until that happens, Europe’s fate is the same as that of other formerly great industrial nations, such as Argentina. However, because of the extreme rigidity of European politics I fear that the economic wasteland opening up in Europe will have consequences that reach even farther than the decline and fall of one of Latin America’s economic powers.

Crisis Conquering France

The deep, persistent European economic crisis is continuing. A few days ago I showed how – predictably – the Greek government is increasing its debt at almost the same rate as before the partial debt default in early 2012. Another sign of the relentlessness of the crisis is that it is slowly but inevitably penetrating the French economy. One symptom is a steadfast increase in unemployment. Here are the latest quarterly data from Eurostat (since this is quarterly data we use seasonally adjusted numbers):

French Unemployment 1

The steady uptick in unemployment coincides to some degree with the socialist government’s deep desire to draw every drip of blood they can from France’s already struggling taxpayers. That policy has backfired, but that does not mean the French government is going to turn to more job-creating policies any time soon.

On the contrary, precisely because of the rising unemployment there is tremendous pressure on the government budget. This pressure has led the EU to express major deficit concerns, and after some batting back and forth between Paris and Brussels the French government has now decided to do exactly what the Eurocrats are asking for. The EU Observer reports:

France’s budget plans are “responsible and prudent” Olli Rehn said Wednesday (26 September) in a sign of rapprochement between the EU and the eurozone’s second largest economy. Speaking to reporters in Brussels following talks with French finance minister, Pierre Moscovici, the EU’s economic affairs chief praised what he described as a “huge effort to restore public finances.” However, he warned Paris to keep up plans to reform the country’s labour market and welfare system commenting that the “ambitious reforms over the last year should be maintained.” The meeting comes a day after Moscovici presented plans to save an additional €18 billion from next year’s budget to the National Assembly in Paris.

There is nothing wrong with labor market reforms that reduce the influence of unions and make it easier for employers and employees to sign whatever contracts they want. France has one of the most heavily regulated labor markets in the industrialized world, and any step in the direction of deregulation is going to make a decisive difference for the better.

Strictly theoretically, there is nothing wrong with welfare reforms either. The problem is that the way the EU is pushing those reforms, they would be implemented at a point when the French economy is burdened with 10+ percent unemployment and punitively high taxes. When people are kicked out of welfare rolls, or receive dramatically less support from them, many won’t be able to find a job to replace welfare as income. That is a recipe for social unrest and political turmoil, as is alarmingly evident from the Greek, Spanish and Portuguese austerity experiences.

A far better way forward is to cut taxes proportionately to the reductions in welfare spending, and to cut the taxes in such a way that you maximize job creation. This will create a predictable, macroeconomically sustainable path from big, onerous government to economic freedom.

Sadly yet predictably, we won’t see any of that in the EU, especially not in France. Back to the EU Observer:

Rehn has had an uneasy relationship with French President Francois Hollande’s socialist government. Last month, the commissioner used an interview in the French media to warn Paris that raising taxes would “destroy growth and handicap the creation of jobs.” For his part, Hollande has accused the EU executive of attempting to “dictate” policy. The EU executive has also been frustrated by France’s failure to bring down its budget deficit below the 3 percent threshold laid out in the bloc’s stability and growth pact, giving the country a two year extension to meet the commitment in May.

Again, look at the steady upward trend in seasonally adjusted unemployment figures above. Who in his right mind thinks a government that is losing almost one percent of its taxpayers to unemployment every year would stand any chance at reducing its budget deficit? Then again, the Eurocracy is not populated with independent-minded people. It is staffed to the brim with bureaucratic yes-men.

To make matters even trickier for the French government, its new-found realization that taxes actually hurt the economy has led it to shifting its austerity policies over toward spending cuts. The EU Observer again:

Moscovici conceded that France would run a higher than forecast 4.1 percent this year, falling to 3.6 percent in 2014 and to 3 percent in 2015. Meanwhile, 20 percent of new budget savings in 2014 would come from tax rises with all savings coming from spending cuts in 2015. The government would also reform the pension system and cut labour costs to increase competitiveness, he said.

There are some strict conditions under which austerity biased entirely toward spending cuts could benefit the economy. However, those conditions are hard to meet and without elaborating in detail on them (I will at some point) I can safely say that France is far from meeting them.

Their ability to bring the budget deficit under control will be weakened further as they continue to try to balance their budget in the face of rising unemployment. You don’t need to go far to find evidence of where France is heading – just look at Greece.

French Tax-Greed Backfire

I never thought I would see this in the news, but… from The Telegraph:

France’s Socialist government has admitted that the country cannot cope with any further tax rises and promised no more hikes just days ahead of the country’s largest ever tax bill. In an unfortunate piece of timing, however, the pledge came just as the environment minister announced the creation of a new “carbon tax” and amid reports that the overall tax pressure on French households will rise even further next year.

A socialist who admits that “the country cannot cope with any further tax rises”! This is indeed a day to commemorate.

But don’t we always hear from the statist camp that taxes are in fact good for the economy? And to the extent they admit that taxes may not be the best things since sliced bread – or even before that – don’t we always hear from them that the benefits of having government spend people’s money vastly outweigh any problems that taxes may cause? So what is the problem, Mon Seigneur Hollande?

Well, it is always refreshing when socialists have to admit that taxes are not the blessing of the world. Usually, though, the admission is not as blatantly open as in this case. The more common way for socialists to admit that they hate taxes is to cheat on their own tax bill. As we know from the first few years of the Obama administration, the left is full of tax cheats. The French socialist government came into office with the same problem.

This only goes to show that tax-to-the-max preachers are themselves very unwilling to live by their own teachings. Thus far, the French socialists have gotten away with their double standards, but as The Telegraph reports, those happy days are coming to an end:

Returning from their summer break, the French are about to discover stinging rises in tax bills in their letter boxes – the result of a series of new levies enacted by President François Hollande as he seeks to plug the French deficit and bring down public debt – now riding at 92 per cent of GDP. But the extent of the hikes has apparently even shocked the very Socialist ministers who implemented them. The total tax pressure (taxes and social security contributions) will account for 46.3 per cent of GDP this year – a historic high – compared to 45 per cent in 2012.

I wonder how they calculate these numbers. The standard Eurostat measurement reports total French government revenue at 51.8 percent of GDP in 2012. But be that as it may – a rise in taxes from 45 percent or 52 percent makes little difference. It is the trend upward that matters, and that is where the problems are for the Frog government.

With all the new taxes in mind it is bizarre to imagine that the forecasts from earlier this year of 1.4 percent growth in the French economy this year, and 1.7 percent in 2014, will ever come true. It is far more likely that the French economy will return to 0.7-1.1 percent bracket where it was stuck during the first years of the current economic crisis.

The Telegraph again:

Some 16 million households will see an automatic 2 per cent rise in income tax as calculations are no longer mitigated by inflation. Family tax breaks will be cut. The rich will see the highest rises, following Mr Hollande’s decision to raise the rate to 45 per cent for those earning more than 150,000 euros – effectively 49 per cent due to an additional levy. Amid discontent at the forthcoming rises,

The top Swedish tax rate is still effectively 60 percent, but I doubt that makes French entrepreneurs and high-earning professionals any happier.

In a clear damage limitation exercise, a chorus of top Socialists spoke out against any more rises. Pierre Mosovici, the finance minister, told France Inter radio: “I’m very sensitive to the French getting fed up with taxes We are listening to them.” Laurent Fabius, the foreign minister followed suit, warning Mr Hollande to be “very, very careful” as “there’s a level above which we shouldn’t climb”.

In all honesty, though, the only reason why they are not raising taxes even higher is that they don’t want to have to fight an election campaign for the next four years to the 2017 elections. The real question that France’s tax-greedy socialists should answer is: when is government big enough? The answer is obviously not “when taxpayers get really mad”. The real answer is embedded in their ideology and will tell us what will happen should the socialists win the next election as well.

Here in America, at least we have a counter-balance against the socialist in the White House. The Republicans in the House of Representatives have effectively stopped the Democrat pursuit of higher taxes. This together with the rising influence of the Tea Party movement on the Republican party has, as Cato Institute senior fellow Dan Mitchell reports, brought the Obama spending binge to a halt.

The French gasp over the higher taxes won’t bring the French government’s spending to a halt. All it will do is pause it for a couple of years. But in the meantime, we should definitely take the opportunity and smile a see-I-told-you-so smile every time we run into a statist. The reaction among France’s leading socialists is an excellent opportunity to once again expose the leftist tax-to-the-max hypocrisy.

Or how about this one from the same article by The Telegraph:

One Socialist told Les Echos newspaper that the hand-wringing was totally hypocritical as “they are crying wolf, but the wolf is us.”

The wolf indeed:

Mr Hollande’s government introduced over 7 billion euros of fresh taxes after coming to power in May 2012 and another 20 billion euros in the 2013 budget. In next year’s budget, the government says spending cuts will account for more than two thirds of the total deficit-reduction effort. But there will still be around six billion euros in new taxes.

It is a safe bet that there won’t be any spending cuts. After these draw-blood-from-a-stone tax increases, Hollande and his socialist cohort will have to fight tooth and nail to win the next election. As in every other welfare state, the safest way to get re-elected is to spend more money on key voter groups just in time for the election. By the same token, you don’t take away money from key voter groups just in time for the election.

Again, let’s enjoy the day. It will be a while again before we see such a blatant admission from a socialist that taxes don’t pave the way to heaven.

Recovery Eludes EU Economy

Is there a recovery under way in Europe? The EU Observer seems to think so:

The eurozone appears to be edging towards economic recovery, according to data published on Wednesday (24 July). Statistics firm Markit revealed that its purchasing managers’ index (PMI), which measures economic conditions based on data from thousands of companies, hit its highest level in 18 months in July. It rose to 50.4, up from 48.7 in June, driven by increased output from private sector companies in France and Germany.

That’s their indicator?? Don’t bet your house on that recovery. A one-time 3.5-percent rise in an index is not exactly a trend. It is small and unique enough to be a one-time blip, and its cause could be anything from an unusual variation in survey answers (who was on vacation in June?) to a temporary spurt in actual economic activity.

It is important to keep this in mind, because Europeans are craving for a recovery, and understandably so after five years of a destructive recession.

Back to the EU Observer:

It is the first time that the index has cleared 50, which marks the tipping point between recession and growth, since January 2012. Manufacturing data was particularly encouraging. Data from Germany, the bloc’s largest economy, indicated that the country’s traditionally strong manufacturing sector rose to 52.8 from June’s 50.4, the strongest reading since February this year. Meanwhile, France’s manufacturing sector also came close to posting growth, with a PMI of 49.8 (up from 48.4 in June), itself a 17-month high.

Another aspect of this is to look at what industries did well and what industries did not do so well. A clogged-up order book at Airbus could result in a growth in manufacturing at its plants and with subcontractors, large enough to register in aggregate data. This is especially likely if the rest of the manufacturing industriy stays flat or declines.

The news has prompted the Bank of France to project that the country’s economy grew by 0.2 percent in the second quarter of 2013, potentially bringing an end to its recession.

A zero-point-two percent growth in GDP is not a reason to bring out the champagne. According to Okun’s Law, an economy that grows at less than two percent per year is not making forward progress in terms of reducing unemployment and increasing the standard of living among its citizenry. Sad to say, inflation-adjusted French GDP growth from 2005 through forecasted 2014 averages a meager 1.2 percent. The 2014 forecast of 0.8 percent is actually lower than the forecast for 2013, according to Eurostat. This points to an extended, or renewed recession, not a recovery.

In addition, the French consumer is hardly a spendoholic these days. Private consumption is the most important driver behind economic activity, and with consumption growth forecast to 0.3 percent for 2013 and an overly optimistic one percent for 2014, there is no hope for a consumption-driven recovery.

If the PMI index continues to improve I will revise my forecast. As of now, though, I am sticking to my prediction that France is going to remain in a deep, rather depressing state of recession. And the French won’t be alone in their despair: the latest GDP growth analysis from Eurostat had Germany’s economy growing at one percent in 2012 while forecasting 0.3 percent for 2013 and one percent for 2014.

Again, as of today there are no signs of a recovery in Europe. Only faint hope glimmering like fireflies in the darkness of an economic wasteland.

Europe Drowning in Debt

The European economy is in bad shape. On May 3 the EU Observer reported:

The eurozone economy will contract by 0.4% in 2013, Economics commissioner Olli Rehn said Friday. Presenting the EU commission’s Spring Economic Forecasts, Rehn said that the bloc would return to growth in 2014 by a slower-than-expected 1.2%. Meanwhile, the average debt levels will hit 96% in 2013.

Looking at the 27 EU member states, things are looking almost as bad: inflation-adjusted GDP growth is forecast to be 0.4 percent this year, though that will probably be adjusted downward in the next few months. EU institutions that publish economic forecasts have a tendency to downgrade their forecasts as the present catches up with the future.

At the same time, total general government debt in the 27 EU countries is heading the other way: from 2010 to 2012 those countries added 1.4 trillion euros to their total debt. In terms of growth rates, EU-27 have added debt at frightening rates over the past few years:

2008: 6.1 percent

2009: 12.8 percent;

2010: 12.3 percent;

2011: 6.7 percent;

2012: 6.7 percent.

Due to an almost total absence of GDP growth, the ratio of debt to current-price GDP has grown at stunning rates:

Debt to GDP EU27

To reinforce the persistent nature of the economic crisis, the EU Observer also reports:

France has moved centre stage in the crisis, after EU economic affairs commissioner Olli Rehn said that the country would fall into recession in 2013 and needs two more years to bring down its budget deficit. Presenting the Commission’s Spring Economic Forecasts on Friday (3 May), Commissioner Rehn described Paris’s forecasts, based on a mere 0.1 percent growth rate, as “overly optimistic.”

It is hard to see how France has ever been out of the Great Recession. From 2008 through 2012 the French economy averaged 0.06 percent in real GDP growth. During the same period of time its debt-to-GDP ratio went from 68.2 percent to 90.4 percent.

This explains why, as I reported recently, the French government is panicking over the prospect of more austerity. They know it has not worked for their southern neighbors and they are not going to stir up the same kind of political turmoil as those policies did in, e.g., Greece. The socialist French government knows that parties like Front National – often perceived, wrongly so, to be ideologically close to the Greek Nazis, Golden Dawn – as well as radical communists could make significant political gains if the French people were subjected to the same bone-crushing fiscal measures as the Mediterranean EU members have implemented.

The French resistance to more austerity caused the EU Commission recently to declare that the War of Austerity is over. It is not, of course, or else there would be a complete course change throughout southern Europe. Furthermore, the EU Commission would not be continuing to pressure Paris over balancing its budget in the midst of a recession. The EU Observer again:

The eurozone’s second largest economy would run deficits of 3.9 percent in 2013 and 4.2 percent in 2014, he said, calling on Francois Hollande’s government to draw up a “front loaded” package of cuts and labour market reforms to stop “persistent deterioration of French competitiveness.” For its part, Paris maintains that it will reduce its deficit to 2.9 percent in 2014, fractionally below the 3 percent limit in the EU’s Stability and Growth Pact. Hollande in March announced that an additional €20 billion worth of tax rises and €10 billion in spending cuts would be included in his budget plans but said no further cuts would be made.

Because if he tries, the socialist government is going to end up in real trouble. Many of the prime minister’s cabinet members are truly fearful of more austerity, for various reasons.

But wait, there’s more:

Crisis-hit Cyprus, which has now finalised a 10 billion bailout, is set to be worst hit by recession with an 8.7 percent fall in output. Meanwhile, the average national debt pile is expected to peak at 96 percent of GDP in 2014, with six countries – Belgium, Ireland, Greece, Italy, Cyprus and Portugal – having debts larger than their annual economic output. Rehn indicated that Spain would also be given an additional two years to bring its deficit down to the 3 percent threshold, while Slovenia would also need more time.

So long as Europe keeps its welfare state, it has no way out. The welfare state is what is driving Europe’s crisis today, and it will continue to do so for as long as the welfare state exists. Nothing is changing for the better. Europe is drowning in its entitlement-driven government debt. The continent is stuck, and the talk about austerity being over is politically motivated hot air.

I stand my my diagnosis: austerity policies exacerbated the financial crisis into a welfare state crisis and turned Europe into an economic wasteland. What used to be a thriving industrialized continent is now facing an endless future of industrial poverty.

Emerging Panic over Stagnant Europe

Austerity is spreading its ever darker shadow over Europe. It has now grown to such proportions that it is beginning to really scare members of Europe’s political elite. Among the deeply concerned are members of the French prime minister’s cabinet. This is big news that few seems to notice. One who does, though, is Ambrose Evans-Pritchard, sharp-eyed editor with The Telegraph:

French president Francois Hollande is facing an anti-austerity revolt from his own ministers as he pushes through a fresh round of tax rises and austerity to meet EU deficit targets. Three cabinet members have launched a joint push for a drastic policy change, warning that [spending] cuts have become self-defeating and are driving the country into a recessionary spiral.

And these are no small words coming out of the French cabinet:

“Its high time we opened a debate on these policies, which are leading the EU towards a debacle. If budget measures are killing growth, it is dangerous and absurd,” said industry minister Arnaud Montebourg. “What is the point of fiscal consolidation if the economy goes to the dogs. Budget discipline is one thing, cutting to death is another,” he said.

See I told you so. But where have the French been over the past five years when Greece has been sinking into the dungeon of austerity, mass unemployment, poverty, economic despair and political extremism? What did the French do to help Spain avoid bone-crushing austerity that has turned middle-class Spaniards into food scavengers? Did a single leading French socialist lift as much as an eyebrow when Portugal was almost torn apart by social unrest following EU-imposed austerity?

Evans-Pritchard does not bring up this European context, but his analysis of the French socialist austerity revolt is nevertheless worth listening to:

Mr Hollande will on Wednesday unveil another round of belt-tightening worth €12bn, even though Paris is already carrying out the harshest fiscal squeeze since the Second World War and France may already be in a triple-dip recession. The cuts are hard to reconcile with Mr Hollande’s campaign pledge last year to end austerity. They have set off furious criticism across the French Left. “Austerity is no longer tenable in Europe today with millions of unemployed,” said social economy minister Benoît Hamon.

So Mr. Hollande has shifted foot. His original plan was to “end austerity” by having government spend more, not less, while still raising taxes through the roof. That alternative does about as much damage down the road as austerity, especially if at the same time you are trying to balance the government budget.

And at the end of the day, the balanced budget is all that matters. It is the pillar upon which Germany has built its unrelenting campaign against “undisciplined” euro-zone members. The doctrine of the balanced budget was one of the cornerstones of the EU constitution – originally turned into constitutional mandate in Article 104c of the Maastricht Treaty of 1992 – and has since been elevated to religious doctrine. No one in Europe questions the economic logic in, so to speak, putting the balanced budget before the horse.

Not even the French who break ranks with the austerity-touting consensus. However, they actually don’t have to, because the nature of the austerity measures is such that it really does not deviate much from the standard European doctrine of maxing out the size of government:

Almost all the austerity measures will come from tax rises, pension fees and a “green’ levy, rather than spending cuts. The state sector will climb to a record 56.9pc of GDP this year as the economic contraction eats into the private sector. Public spending has reached Scandinavian levels … Critics say the French tax squeeze is not even helping to curb borrowing. France is at growing risk of a debt trap as the slump itself erodes tax revenues. Public debt will jump to 94pc of GDP next year, a drastic upward revision from 90.5pc.

Spending cuts would have made no real difference. Look at Greece, Portugal, Spain and Cyprus. The problem is the over-arching focus on balancing the budget in a recession.

Evidently, as Evans-Pritchard reports, the bad shape of the European economy, after years of unrelenting spending cuts and tax increases, is so bad that the political elite is beginning to panic:

A report prepared for EMU finance ministers over the weekend by the Breugel forum in Brussels said the eurozone’s crisis strategy is a failure, a nexus of confused policies that cut against each other. Fiscal overkill is stopping the banks returning to health, while foot-dragging on the EU bank union is perpetuating the credit crunch in the Club Med bloc. Sky-high unemployment is eroding job skills and “undermining Europe’s long-term growth potential”. Low growth is making it “much tougher for hard-hit economies in southern Europe to recover competititveness and regain control of their public finances”.

This is a good, first look at Europe’s deep structural problems. Austerity is not a structurally oriented policy, but it interacts with a lot of structural features of the European economy that, taken together, conspire to trap the economy in perpetual stagnation. One of those structural features is the system of excessively rigid labor laws. By interfering with the need of businesses to make flexible adjustments of their work force, Europe’s hire-and-fire laws significantly raise the cost of doing business, especially for smaller firms.

As a result, Europe’s work force is not working up to its potential. Tens of millions of workers get stuck in jobs that do not produce optimally, and tens of millions of others get stuck in unemployment. One symptom of this is low labor productivity, which the Breugel Forum notes in its report about Europe’s labor productivity:

Since 2007, the EU15 has taken a productivity holiday, while productivity has increased rapidly in the US (Figure 3). In terms of total factor productivity, both the EU15 and EU12 lag behind Japan. Even economically stronger countries, such as Germany, lag behind the US, and the evolution in the United Kingdom does not differ markedly from that of continental economies. Some hard-hit countries, such as Ireland, Spain and Latvia, have apparently recorded outstanding labour productivity performances since 2007, but most of these gains have been due to compositional changes, such as the shrinkage of low-productivity construction and low value-added services, and the total factor productivity developments in these countries were weak.

By making it excessively costly for businesses to downsize in tough times, Europe’s governments cause a phenomenon called “labor hoarding”, the effects of which the Breugel Forum report explain well:

Labour hoarding can partly explain the initial response to the shock of the recession. Employment contracted by five percent between 2007 and 2010 in the US, while in several European countries the employment shock was of limited magnitude. Public policies, such as Kurzarbeit, a scheme financed by the German government to support part-time work and keep workers employed, were one factor behind this response. Firms also hoarded labour, expecting a rebound and thereby limiting the initial rise in unemployment. Five years on, however, the productivity setback has become permanent, contributing to lower potential output. This cannot be regarded as a cyclical phenomenon anymore. In the short run, weak productivity performance can be related to insufficient demand through the so-called productivity cycle. But the weak cyclical position of the economy cannot explain sustained poor productivity.

It is good that some Europeans with access to the “big stage” are beginning to look deeper into what is really happening to the deeply troubled European economy. However, so long as they do not realize that the welfare state is the root cause of the problems, they will not be able to prescribe a medicine that could actually cure the patient.

The lack of insight into Europe’s ailment will drive the continent straight into the economic wasteland. As tepid as the American recovery is, it offers an infinitely better platform for the future than what the Old World could ever come up with.

French Hate Tax Hits Soccer Stars

The notorious French hate tax on high incomes was supposed to prevent the Greek-Portuguese-Spanish economic disaster from sneaking across the borders into the Land of Cheap Wine and Unreliable Cars. By confiscating most of what high income earners make, the new socialist government thought it would create some kind of economic recovery.

That, of course, did not happen. If anything, the French economy is destined for an even deeper recession than the one it has been stuck in over the past few years. This time, though, there are going to be fewer high-productive, job-creating people around to alleviate the downturn. In addition to the tax emigration by celebrities such as Gerard Depardieu, Brigitte Bardot and former president Sarkozy, many high-earning French professionals are moving to London, where they will soon enough be able to mark their own Frenchtown on the map.

The French Prime Minister, Jean-Marc Ayrault, has called these taxpatriates “greedy”, not stopping to think for a moment who is really greedy here – the people who worked to earn the money or the people who use brute force to take most of that money. But Mr. Ayrault is up against a strong opponent – the desire among human beings to reap the harvests of their own hard work. And there are few places where that desire is more prevalent than in sports, which spells trouble for Mr. Ayrault. Bloomberg reports that the hate tax will hit high-earning soccer stars in the French professional league:

Paris St. Germain, France’s richest soccer club, will have more on its agenda than controlling Lionel Messi when it takes on Barcelona, the world’s best team, tonight. PSG’s Qatari owners also have the tax man to think about. After conflicting messages by government officials, Prime Minister Jean-Marc Ayrault’s office issued a statement today confirming that a 75 percent surcharge on salaries above 1 million euros ($1.3 million) will apply to soccer clubs. At least 12 members of Paris Saint-Germain make more than 1 million a year, according to France Football magazine.

And that is just one club.

“This new tax will cost first-division teams 82 million euros,” France’s Football League said in a statement. “With these crazy labor costs, France will lose its best players, our clubs will see their competitiveness in Europe decline, and the government will lose its best taxpayers.”

I cannot help but wonder how many of these soccer players have leftist political sympathies. At least one of the highest-paid players in France, Swedish native Zlatan Ibrahimovic, has on occasion declared strong sympathies for socialist policies. This is usually the case with sports stars – they tend to be a little bit like Hollywood celebrities, with lots of money and conventional, superficial wisdoms to share when it comes to politics.

That aside, it remains to be seen whether or not this tax will survive both the erosion of its tax base and the legal challenges that are apparently still going:

President Francois Hollande made the 75-percent tax a cornerstone of his successful presidential campaign last year, saying the wealthiest had to make a special contribution toward cutting France’s deficit. … A first attempt to put the tax into law was shot down by the constitutional court last December because the tax applied to individuals and not households. While the government then said it would rewrite the tax for 2014, the country’s top administrative court said any rate above 66 percent could be rejected as confiscatory.

Now that’s interesting. How do they determine when a tax is confiscatory – and when it is not? As far as common sense and Locke-based natural-rights theory goes, any tax is confiscatory that does not go toward paying for the minimal state’s functions: the protection of life, liberty and property.

From an economic viewpoint there is no absolute cut-off point where a tax switches from being neutral to being a burden on productive economic activity. The negative effect starts kicking in with the first cent of taxes, but as taxes go up the private sector copes and adapts and continues to function. However, the higher taxes get the more the private sector has to spend on adapting and accommodating. Eventually, the net effect is a steady decline in economic activity and prosperity.

Preliminary numbers that I have yet to publish show that this point lies somewhere around 38-40 percent in taxes on GDP. This does not mean that taxes, up to that point, are free from negative influences on the private sector. But it means that so long as taxes remain below those numbers, the private sector can still survive given its accommodations costs on top of the taxes.

France has since long past the 40-percent marker and its on a path to slow but inevitable decline. The 75-percent hate tax is going to do one thing only, namely to speed up that decline.

Europe’s Crisis Gaining Momentum

It is beginning to dawn on the European political elite that their superstate project, their welfare state and their currency union are on a runaway train heading for disaster. Media is beginning to pick up on that as well. Here is a nice summary by Benjamin Fox at the EU Observer:

February 22 was a black Friday wherever you were in Europe. The morning brought the publication of dismal economic data to the effect that the eurozone will remain in recession in 2013.

Only a statistical illiterate would have thought otherwise.

Then, at 10pm Brussels time as the the markets closed, ratings agency Moody’s quietly issued a statement stripping the UK of its AAA credit rating. For those lulled into a false sense of security through a recent combination of relatively benign financial markets and the euro strengthening against sterling and the yen, it was a rude awakening.

That surge was due mainly to one thing: the commitment by the European Central Bank to print an infinite amount of euros to back its worst-rated treasury bonds. That commitment told global investors that “you can get seven percent return on Spanish treasury bonds and always get your investment back from us – come Hell or High Water!” Of course the euro is going to experience a temporary surge under such ridiculous, and totally unsustainable conditions.

EU Observer again:

Reading the European Commission’s Winter Forecast is a singularly dispiriting experience. The bald figures are that the eurozone is expected to remain in recession with a 0.3 percent contraction in 2013. The words “sluggish … weak … vulnerable … modest … fragile’” litter the 140 pages of charts and analysis.

Some examples of GDP growth numbers from the Forecast: Britain +0.9 percent in 2013; Austria +0.7 percent; Germany +0.5 percent; France +0.1 percent; Netherlands -0.6 percent; Italy -1.0 percent; Spain -1.4 percent; Portugal -1.9 percent; Greece -4.4 percent.

There are a couple of exceptions with slightly higher growth rates, primarily Sweden and Poland. Both economies are heavily dependent on exports and compete increasingly for the same low-paying manufacturing jobs. Due to a better working labor market and a more friendly tax environment my bet is Poland will eke out a victory in that competition, which would further depress the Swedish growth number.

That aside, there is a lot to be seriously worried about in the Commission’s Winter Forecast numbers. The overall standstill in GDP is very worrying, as 2013 represents the fifth year of a crisis that was originally relatively manageable but which has been made far worse by disastrous austerity measures. Since the Eurocracy – both political and administrative – remains committed to austerity, it is basically impossible to find any scenario that would allow Europe’s troubled economies to pull out of this endless recession.

I have warned about this before, and I recently drew the conclusion that Europe is in a state of permanent decline and that this permanent decline involves a drastic reduction in the standard of living for young Europeans – their prosperity is, so to speak, on hold. I also recently explained that Europe now represents what we could define as industrial poverty, that it is becoming an economic wasteland plagued by high unemployment, a static standard of living and overall lost opportunities for everyone except a small, political elite that – thus far – can live high on the hog in the Eurocratic ivory tower.

Perhaps I should take joy in the fact that my analysis has been spot on all the way. But that would be cynical, and I am not prone to either cynicism or schadenfreude. I am sincerely angered by what big government has done to Europe, and I fear that the only way out of this situation is a political Balkanization of the entire continent. That means a disorderly fragmentation, with outlier countries being ruled by fascists or stalinists (In Greece, both are about the same influential size in parliament) and panic forcing a return to national currencies under great financial and fiscal turmoil.

I would of course like to see Europe make an orderly retreat from the EU project, and I wholeheartedly support Euroskeptic heroes like Nigel Farage in fighting to secure that orderly retreat. However, as things look right now I predict that the economic crisis that is sweeping like a bonfire across Europe will burn down the better of the European economy before Mr. Farage and his fellow Euroskeptics gain enough momentum to put out that fire with free-market reforms and structural reductions to Europe’s enormous government.

Unfortunately, there is a lot to back up that last prediction. One example: the Greek economy is going to contract by another 4.4 percent in 2013. The Greek have already lost one quarter of their GDP since the crisis began in 2009. This is nothing short of economic free-fall, a recession that has escalated into full-scale depression, fueled by the destructive forces of austerity.

Back to Benjamin Fox in the EU Observer:

Spain’s budget deficit has cleared 10 percent. The average eurozone country now has a debt to GDP ratio of 95 percent – a figure that observers had previously thought was applicable only to Italy and Greece.

Those observers thought austerity would improve economic conditions in the countries where it is applied. It does not, it never has and it never will.

Mr. Fox then notes that the crisis is spreading beyond its “origin”, Greece:

While the Greek economy will contract by a further 4.4 percent this year – by the end of 2013 Greek economic output will have fallen by more than a quarter in five years – the clear indication from the Winter Forecast is that Athens is no longer in the eye of the storm.  Paris and Madrid now have that unwanted place. France was one of a handful of countries called out for censure by commissioner Rehn on Friday. The French budget deficit remains stubbornly high, falling by a mere 0.6 percent to 4.6 percent in 2012. The commission’s projections have it remaining above the 3 percent threshold in 2013 and 2014. Ominously, Rehn told reporters that the commission would prepare a full report on France’s public spending after Paris prepares its next budget plan, adding that President Francois Hollande’s government needs to “pursue structural reforms alongside a consolidation programme.”

The Eurocrats may get away with destroying 25 percent of the Greek economy. But before they set out to do the same to France, they should consider the law of big numbers. France is the second largest euro-zone economy. If you destroy one quarter of that economy, you will accelerate the current European crisis from a looming depression into something that could even be more devastating than the Great Depression.

Mr. Rehn and his Eurocrat cohorts are not playing with fire. They are playing with a macroeconomic Hiroshima.

Benjamin Fox at the EU Observer does not quite seem to get the magnitude of the problems he is reporting, but that does not take away from his reporting them:

Some of the figures that leap off the pages of the Spanish assessment are truly alarming. Spain’s budget deficit actually increased to 10.2 percent in 2012, although the data does not include the savings from spending cuts and tax rises at national and regional level in the final weeks of the year, estimated to be worth 3.2 percent. Even then, the country will still have averaged a 10 percent deficit over the last four years. By the end of 2014, its debt pile will have nearly doubled to 101 percent of GDP over the space of five years.

Well, the good old Keynesian multiplier will tell you that if you contract government spending by 3.2 percent of GDP in that short of a time period, you can expect the private sector to contract by at least as much over the next 4-6 quarters. However, a recent IMF study showed that the multiplier works faster for reductions in government spending than for any type of increase in macroeconomic activity. Therefore, the negative repercussions of these Spanish austerity measures could begin to make themselves known in the Spanish economy already in the first quarter of this year.

Such a contraction in private-sector activity will erode the tax base and increase demand for tax-paid entitlements. As a result, the deficit will bounce back up again and probably exhibit a net increase.

In other words, what Mr. Fox sees as a mysterious persistence in deficits is really a logical consequence of the economic policies of the Spanish central and regional governments.

One of the many social disasters that will characterize the permanent European decline is very high, very costly unemployment. Mr. Fox notes this:

The headline rate of 11.7 percent unemployment across the eurozone is bad enough, but it is the sharp rise in long-term joblessness that is most concerning. Forty five percent of the EU’s unemployed have been out of work for more than a year, and in eight countries this figure rises to over one in two. In Spain, Greece and Portugal, where the unemployment rate is above 15 percent and youth unemployment sits close to one in two…

That’s 50 percent youth unemployment. Consider what that means for the loyalty of the young toward their country – and its political, economic and cultural leaders.

…millions of Europeans risk being locked out of the labour market for good. In the foreword to the Winter Forecast, Marco Buti, head of the commission’s economics department, rightly acknowledges the “grave social consequences” resulting from the unemployment crisis. But it is more dangerous than that. As the commission paper concedes “long-term unemployment is associated with lower employability of job seekers and a lower sensitivity of the labour market to economic upturns.” The longer people are out of work, the more likely it is that high unemployment rates become a structural feature of the European economy.

Not to mention their proneness to support extremist political parties. Support for Golden Dawn, the Greek Nazis, does not come solely from the police and the military.

I am sometimes asked what I think Europe can do about this crisis. I have tossed and turned that question around, and I am sad to say that my answer is very short: “very little”. That said, here are some desperate measures that could at least give Europe a chance:

1. Fiscal cease-fire. Stop with the austerity measures right now.

2. Labor-market deregulation. Most of Europe suffers from very rigid hire-and-fire laws. Give Europe’s employers a chance to take on new workers without having to make a de facto life-time commitment to them.

3. Flatten the tax structure. One of Europe’s most discouraging features is the steep marginal income taxes. Give job creators a chance to keep more of their money.

4. Orderly EU retreat. Let the Euroskeptics design a plan to dismantle the entire EU project and liberate the nation states – and, most important of all, their peoples – from this authoritarian, growth-stifling, freedom-eating bureauacracy.

5. Bye, bye to the welfare state. Europe needs a long-term plan – unique to each country – to get rid of its entitlement-based welfare state. Some ideas for America can perhaps be of inspiration for Europe as well.

These are, again, some very short points. I do not see fertile ground for either of them at this point, let alone for a more elaborate plan. However, there may still be hope to save individual countries, such as Britain, if right-minded political leaders can gain more influence.

But even if Britain and a couple of other countries escape the fury of the current crisis, the political, economic and social landscape of Europe will look very different in five years than it does today. And it won’t be for the better of Europe’s suffering masses.